Question

An investor determines he can build a commercial building at a cost of $150,000 and can lease the building at $30,000 annual rent with expenses of $6,000. If he expects a 12% return on his investment, what is the maximum he can spend to buy the land?

Answer 1

The maximum amount the investor can spend to buy the land is $200,000.

Step-by-step explanation:

To determine the maximum amount the investor can spend to buy the land, we need to calculate the net operating income (NOI) and divide it by the investor's expected return rate. The NOI is the annual rent minus the expenses, which gives us $30,000 - $6,000 = $24,000. Next, we divide the NOI by the expected return rate expressed as a decimal: $24,000 / 0.12 = $200,000. Therefore, the maximum amount the investor can spend to buy the land is $200,000.